Finally, someone is able to articulate the difference between how you manage the finances for a household or company versus how the US Government manages finances. Both political parties use different language and have different agendas but consistently say that since you can’t run your household by spending more than you make, at least not for the long term, it is self-evident that you can’t run the US government by spending more than it gets as income from taxes and fees. This is utter nonsense.
I almost said “the extremes of both political parties” but I no longer believe there is anything but extremes.
I will not be able to say it as well as Stephanie Kelton did on Harry Shearer’s Le Show, 28 October 2012. Please read the transcript.
The basic difference between the US government and your own household is that you are not allowed to create money, but the US government can and in fact it is one of the primary functions of a country’s government. It can print as much as it wants whenever it wants. This is called a fiat money system. The only threat to the US ability to pay its debts was when Congress got on its high horse and decided that the US government just might not pay them.
Of course, the government should not simply create money to fund any program it wants. But the US government must create money in order to grow the economy since in a real sense it is the number of available dollars that is the measure of the economy. By regulating the amount of available money, the government can cause or dampen inflation, or spur or stifle growth. If you remember back to the Jimmy Carter days you saw how the Federal Reserve managed to stifle growth and cause inflation, or the Ronald Reagan days with low inflation and significant growth. You might also notice that the deficit grew significantly under Reagan. Now we have low inflation, no growth and a ballooning deficit that is not providing any benefit.
Politicians also talk about the ratio of debt to GDP, and moan that the US ratio is over 100%. That just sounds awful. But the Japanese ratio is about 200%, and they are doing OK. Some politicians have threatened that we will become another Greece. But there is no comparison between the Greece of today and the US government in terms of country finances. Greece cannot create money. When Greece joined the Euro Zone in 2001 it gave up a very important part of its sovereignty, namely the ability to manage its own currency. The European Central Bank reserves for itself the right to create Euros. The ECB only authorizes Eurozone countries to exchange money in Euros, so Greece is stuck. It has to go hat in hand to the ECB and beg for Euros. If it doesn’t get them, then Greece defaults on its loans. This enables the ECB to impose its own version of “good” on Greece in exchange. Greece did not change its behavior after joining the Eurozone. Somehow it managed to get through fifty years after World War II with the same “bad” behavior without any problems. OK, sometimes it had to pay higher interest to borrow money, but the lenders knew the debts would be paid. The loan was just a bet on relative inflation between the Drachma and Pound or Mark or Dollar.
Greece has turned itself into local government, like a US state or county or city, or your household. None of these can create their own currency, so they have to balance their books.
I suspect a large part of the perception problem is that words like “debt,” “deficit,” and “borrowing” have a different connotation when applied to the US government than when applied to a family.
Please spend the 15-20 minutes it will take to read the transcript, and let it percolate in your mind for a few days. At a minimum you will understand that the Chinese are not taking advantage of us, but we are taking advantage of the Chinese.
The last word:
In 1939, Robert A. Heinlein wrote his first novel For Us, the Living. It was not published until 2004 because it was, frankly, lousy. He had not yet developed his story telling and character development skills; it comes across more as a series of lectures. In Chapter IX and the Appendix he describes a simple game that allows you to experiment and demonstrate why governments need to create money, and what happens when they create too little or too much.
Keep your sense of humor.